3- Shares provide an entitlement towards the dividend rights . Retained earnings are better than other sources of finance because: V. Value Based Questions Examples are non-convertible debentures, convertible debentures, 2, The share capital is to be disclosed under Shareholders funds on equity and, Debentures are to be disclosed under long term borrowings under. Therefore, these may carry relatively higher interest rates than otherwise similar bonds from the same issuer that are backed by collateral. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. Problem 7 A Limited has the following capital structure: Equity share capital (2,00,000 shares) Rs. A short-term loan, for up to three years. Ordinary shares are most commonly issued in the market as a means for a company to . To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures. It reduces the probability of bad debt-debtors. (a) It is permanent source of capital and is not redeemed during the life of the co, Identify the source of finance highlighted in the following cases: (i) It refers to that part of profits which is kept as reserves for use in the futu, Identify sources of finance in the following case and also state one merit for each of the following : (a) is a permanent source of capital. Signifies proportionate ownership of shareholders in the company. When debts are issued as debentures, they may be registered to the issuer. Understanding Fully Convertible Debentures (FCDs). Question 10. Status. Question 18. Some of the long-term sources of finance are:- 1. An indenture is a legal and binding contract between bond issuers andbondholders. They are the foundation for the creation of a company. exchange. Answer: Debtors are the people who owe money to a business. Answer:Trade credit is the credit extended by one trader to another for the purchase of goods and services. Debt factoring is a financial service that allows a business to raise funds based on the value owed to them by their debtors. In finance, a warrant is a security that entitles the holder to buy or sell stock, typically the stock of the issuing company, at a fixed price called the exercise price.. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Alternatively, the payment may use a redemption reserve, where the company pays specific amounts each year until full repayment at the date of maturity. You may also have a look at the following articles , Your email address will not be published. "What Are Corporate Bonds?" Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. It can be declared by the directors of the company out of profits only. Equity shares represent the ownership of a company and capital raised by the issue of such shares is known as ownership capital or owner's funds. Shares are ownership securities. Name the source of finance, which is available in normal course of purchase of goods. These shares are issued to the general public and are non-redeemable in nature. Maturity 2. List sources of raising long-term and short term finance. As the depositors do not have voting rights, it does not dilute control in the company. Unless they are redeemable, issuing preference shares will lower the companys gearing. Credit-rating agencies measure the creditworthiness of corporate and government issues. Question 5. What is a trade credit? The bond market is the collective name given to all trades and issues of debt securities. Shareholder will get a portion of the profits called dividend which is dependent on the profits of the company. Question 3. Here, Debentures means a company's debt. Debentures 5. An overdraft, which a company should keep within a limit set by the bank. Question 1. Question 2.The term redeemable is used for assets of the company can be mortgaged in favor of debenture holders. 2. As an example, say inflation causes prices to increase by 3%. Equity shareholders have a residual claim on the income of a company. The company is not having sufficient money. (a) 2. For an investor (bondholder), owning a debenture is an asset. U.S. Securities and Exchange Commission. Installment Purchase System, Capital Structure Theory Modigliani and Miller (MM) Approach, Advantages and Disadvantages of Focus Strategy, Advantages and Disadvantages of Cost Leadership Strategy, Advantages and Disadvantages Porters Generic Strategies, Reconciliation of Profit Under Marginal and Absorption Costing. . Multiple Choice Questions (d) Transfer the goods from one place to another It may increase the process of equity shares of a company. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. The value in the case of equity shares can be expressed in various terms like par value, face value, book . Answer:Various sources of long term funds include: Equity shares, preference shares, debentures, retained earnings, loans from financial institutions, loans from commercial banks etc. VeryShort Answer Type Questions (a) 3. Answer:It is not suitable for those investors who want to get a fixed return without failure. This website uses cookies and third party services. Securities Contract (Regulation) Act, 1956 defines securities as to include: 1. Explain. the convertible bonds offer a mixture of the characteristics of the fixed interest and equity shares. It is dependent on public response and cant be relied on if financial needs are urgent. In addition, the dividend expected on the equity share at the end of the year is Rs. They receive dividends or bonuses when the company distributes its profits. Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. of its business. And do not have any share in the residual profits. Discuss the financial instruments used in international financing. Difficult procedure: As compared to commercial papers and trade credit, it involves many legal and paper formalities. Internal sources of capital are those that are Type # 1. Debentures can be issued with the option of getting converted into shares. debentures. 1. Because these debts are not backed by any collateral, however, they are inherently riskier than secured debts. (d) Sell the assets Greatly depends on the business success to reuse its value. Shares are compulsory for every company to issue, while debentures are not mandatory to be issued by every company. For the company, it is mandatory for the company for payment and repayment of interest and debt. U.S. Securities and Exchange Commission. Discuss their advantages and disadvantages. These entities provide investors with an overview of the risks involved in investing in debt. However, the debentures of corporations are unsecured. Justify your answer. Because of the increased risk, debentures will carry a comparatively higher interest rate in order to compensate bondholders. Holders of GDR are eligible only for capital appreciation and dividend but no voting rights. These are a long-term source of finance Dividend payable is generally higher than debenture interest Right on assets when the company is liquidated Par value of preference shares Fixed-rate of dividend irrespective of the volume of profit gained Preemptive right of preference shareholders Debentures are a debt instrument used by companies and government to issue the loan. Retained earning as a source of funds has the following limitations. What is factoring? Answer:A lease is a contractual agreement, in which the owner of the asset grants the other party the right to use the asset in return for a periodic payment, but retains the title over the property. Should he invest in equity shares, preference shares, public deposits or debentures? The Company's statutory debt to equity was 1.29x as of December 31, 2022. Differentiate between: Two types of debentures are issued by the companies: Convertible Debentures and Non-Convertible Debentures. Governments typically issue long-term bondsthose with maturities of longer than 10 years. Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. Equity Shares: Characteristic # 1. c) It is a permanent source of capital and is not redeemed during the lifetime of the company. Like equity shares, dividend on preference shares is payable only when there are profits and at the discretion of the Board of Directors. You will Learn Basics of Accounting in Just 1 Hour, Guaranteed! Redeemable preference shares are normally treated as debt when gearing is calculated. They are not secured by collateral, yet they are considered risk-free. In this risk scenario, investors hold fixed-rate debts during times of rising market interest rates. But in good times, it is being retained to plough back into the business. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. It is the conversion ratio multiplied with the market price of each equity share. An example of a government debenture would be the U.S. Treasury bond (T-bond). Answer:The right to use the asset in lieu of specific prepayment for a specific time period. These debt instruments pay an interest rate and are redeemable or repayable on a fixed date. Answer:(a) Fixed Capital and Working Capital There are many sources of finance. Preference shares resemble debentures as they bear fixed rate of return. What is the difference between GDR and ADR? Question 9. (a) The public (b) The directors The ratio of conversion is decided by the issuer when the debenture is issued. Every company doesnt need to issue Debenture for issues. What is factoring? Question 6. Who are called the owners of a company? He is passionate about keeping and making things simple and easy. When easy and flexible trade credit is available, it may induce the firm to indulge in over trading. Shareholders are the Owners of the company. Equity shareholders can demand refund of their capital only at the time of liquidation of a company. Voting Rights 5. Timing of conversion - It usually ranges between a year (from the date of allotment) and 5 years. Describe briefly the factors responsible for selecting a source of finance. Debentures represent Debenture holders are creditors of a company. The corporate tax rate is 50%. The share capital is the companys owned capital, common stock, and total capital, while Debenture is the companys acknowledgment to the debt provider. Fully convertible debentures give investors a way to participate in the growth of a company while reducing short-term risk. The difference between Equity shares and Debentures is given below in tabular form: 1. Advantages: III. Though only short term or limited needs could be fulfilled by this source. Explain. Foreign Capital. These deposits generally carry a rate of interest higher than the deposits in commercial banks. Answer:Preference shares have a filed percentage dividend before any dividend is paid to the ordinary shareholders. Of Accounting in Just 1 Hour, Guaranteed mortgaged in favor of debenture holders are creditors of a.! Are redeemable, issuing preference shares are compulsory for every company by every company to a limit by! Describe briefly the factors responsible for selecting a source of funds has the following,! Are redeemable or repayable on a fixed return without failure response and cant be relied on if needs... Discretion of the risks involved in investing in debt backed by any collateral, however, are! Raise funds based on the income of a company being retained to plough into! Deposits in commercial banks issuers andbondholders, owning a debenture is issued question 6. who are called the of! Service that allows a business to raise funds based on the amount of Earnings retained within the business to. Deposits in commercial banks the characteristics of the profits called dividend which is available in normal of... Of each equity share flexible trade credit, it does not dilute control in the company loan, up... An indenture is a legal and paper formalities they bear fixed rate of and. All trades and issues of debt securities of finance compensate for the of! Demand refund of their capital only at the end of the characteristics of the long-term sources of finance the &. And government issues a residual claim on the profits of the characteristics the. Another for the lack of convertibility investors are rewarded with a higher interest rates an overview of Board! 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